Transcontinental Inc. (TSX: TCL.A) is a Canadian printer and flexible packaging provider that operates in three segments, namely packaging, printing, and others. The company’s packaging segment features the production of different plastic products geared toward consumer goods.

Key Highlights:

• Impressive outlook: For FY22, the management expects volume growth driven by new contract signing coupled with the introduction of new products. Within the printing sector, the group expects a revival in the printing volume, supported by the growth in its in-store marketing activities and other growth activities. Additionally, the company also expects an increase in adjusted operating earnings before depreciation and amortization in FY22, as compared to FY21, which is encouraging.
  

• Stable dividend payment: The company has a strong history of consistent dividend payment, backed by stable cash flows. Moreover, the TCL.A stock is carrying a dividend yield of ~5.498% on an annualized basis, which looks impressive the futuristic interest rate scenario. Notably, the company reported a 10.2% CAGR growth in its dividend distribution from 1993 to 2021, which is encouraging.

Source: Company Presentation

• Acquisition of Scolab Inc.: Recently, the company reported the acquisition of Scolab Inc., which is a leader in the development of digital educational products. Scolab caters to several students and teachers across the Canada and United States. Hence, this would mark the company’s expansion with digital educational space for the elementary and secondary levels.

Risks associated with the Business:

The company might witness margin pressure due to the increase in input costs like raw materials, labour etc. Further imposition of restriction on account of rising Covid cases might hinder the demand for packaging products due to supply chain distribution.

Q1FY22 Financial Highlights

Q1FY22 Income Statement Highlights (Source: Company Report)

• A announced its quarterly result, wherein the company posted revenues of CAD 690.6 million in Q1FY22, improved from CAD 622.7 million in pcp. The growth was supported by improved performance from both printing and packaging segments.
• Operating earnings slide to CAD 33.8 million in Q1FY22, as compared to CAD 47.2 million in pcp, due to a rise in operating expenses. On the other hand, depreciation & amortization costs stood at par with the previous corresponding period.
• Net earnings stood were recorded at CAD 18.3 million versus CAD 27.8 million in Q1FY21. The company’s net profit was partially supported by lower net financial expenses and a decline in income tax expenses.
  

  Valuation Methodology (Illustrative): P/E based

Analysis by Kalkine Group

Stock Recommendation:

For Q1FY22, the company reported impressive revenue growth driven by the recent acquisitions across both printing and packaging sector. For FY22, the company expect to generate ample cash flows from its operating activities. These cash flows are expected to enable the company to reduce its indebtedness and would focus on stable organic growth as well as strategic and targeted acquisitions. We have valued the stock using the Price to Earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Intertape Polymer Group Inc, Richards Packaging Income Fund etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of TCL.A at the last closing price of CAD 16.37 on April 22, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 22, 2022). Analysis by Kalkine Group

   Technical Analysis Summary

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